News

Despite a number of key U.S. federal antitrust posts remaining vacant,1 the antitrust authorities have remained quite active. Below, we discuss five recent transactions and what those cases might mean for merger enforcement in the United States in the coming months and years.

Parker-Hannifin/Clarcor

On Sept. 26, 2017, the U.S. Department of Justice challenged Parker-Hannifin's consummated acquisition of Clarcor Inc.,2 alleging that the transaction substantially lessened competition in aviation fuel filtration systems. Interestingly, the DOJ's challenge came nearly nine months after the Hart-Scott-Rodino Act's mandatory waiting period expired without agency action.3

The DOJ alleged that the combination of Parker-Hannifin's Velcon-branded filtration products with Clarcor's PECOFacet-branded filtration products "effectively created a monopoly" for such products and eliminated head-to-head competition between the parties, resulting in a substantial loss of price, service and innovation competition.4 Specifically, the DOJ alleged that Parker-Hannifin and Clarcor are the only two domestic suppliers for aviation fuel filtration products.5 The DOJ emphasized that the parties' systems are the only available products that have passed the rigorous qualification and certification process mandated in U.S. commercial and military aircraft.6 Moreover, the DOJ alleged that U.S. commercial and military aviation customers were unlikely to rely on a foreign supplier that lacked a U.S. presence in sales, product, training or technical support, especially as most customers in the industry demanded readily available product supplies and service offerings.7

In furthering its allegations, the DOJ cited in the complaint an internal Parker-Hannifin email discussing the "area of overlap" between the two companies, questioning whether the parties should be "forthcoming" about this "aviation antitrust potential," and stating that Parker-Hannifin was "preparing for the possibility" that it may have to "divest CLARCOR's aviation ground fuel filtration" business.8

The DOJ requested the court to order the divestiture of either Parker-Hannifin's or Clarcor's aviation fuel system business, and "to create a separate, distinct, and viable competing business that can replace CLARCOR's competitive significance in the marketplace."9

Enforcement actions against closed transactions, while rare, do occur.10 This is especially true in situations where: (1) the parties were not required to make an HSR filing, and the authorities only found out about the transaction after closing; (2) an HSR filing was required, but customers were late to voice concerns; or (3) the overlap is a very small part of the transaction and not readily apparent to the investigating agency.11 Even if an overlap is relatively small, the enforcers are not likely to ignore a potentially problematic transaction – here, Parker-Hannifin's and Clarcor's filtration businesses brought in less than $20 million in annual revenue, less than 0.5 percent of the $4.3 billion deal.12

Merging parties should consider identifying overlaps for the antitrust authorities early in the investigation process, or risk a post-closing enforcement action if the enforcers identify an issue after the transaction has closed. Commenting on the Parker-Hannifin suit, a DOJ official noted that "if there's really some clear and obvious overlap it may behoove counsel to raise that."13 It appears that Parker-Hannifin may not have raised the potential fuel filter overlap to the DOJ, despite acknowledging the overlap in internal emails. Moreover, Parker-Hannifin refused the DOJ's request to hold separate the Clarcor filtration business while the DOJ conducted its investigation,14 and, as a result, the DOJ brought this action.

Valero/Plains

Despite the Federal Trade Commission declining to take action against Valero's proposed acquisition of two Northern California bulk petroleum terminals from Plains All American Pipeline,15 the California attorney general filed suit in the Northern District of California, seeking to obtain a temporary restraining order and enjoin the transaction.16 California alleged that Plains, the "only independent terminal owner in the Bay Area," was a maverick competitor. California further alleged that Valero's acquisition would permit the integrated refiner to reduce competitor access to the terminal hub, which would result in increased fuel prices at the pump.17 In addition to the concern that Valero would be able to recoup lost terminal profits through a downstream increase in gas prices, California also alleged that once all the fuel terminals were vertically integrated, there would be a higher risk of coordination among vertically integrated providers to similarly reduce supply into the terminal and increase downstream fuel prices.18

The court denied the temporary restraining order and criticized California for waiting until the "eleventh hour" to file a restraining order – 10 days after the HSR waiting period had expired and on the day of the parties' announced closing.19 A little over a month after denying the temporary restraining order, the court denied California's preliminary injunction motion. The court noted that the order was unnecessary, stating it would be "easy to restore the status quo"20 because: (1) Plains' long-term contracts prevented Valero from restricting terminal services from any existing customers during the course of the planned litigation, and (2) the defendants provided a declaration detailing firewalls and other commitments to maintain separate businesses.21

In the order, however, the court also stated that California had raised "serious questions" about the anti-competitive effect of the transaction,22 and that while the merging parties made "several arguments to the contrary," "none of these [arguments] overcome these serious concerns."23 Moreover, the court made clear that "if permanent relief is granted and divestiture ordered, defendants will not be heard to complain about any reliance built upon the closing of the transaction. Defendants proceed entirely at their own risk if they close …"24

As a result, despite no action by the FTC and the court denying California's requests for a temporary restraining order and preliminary injunction, Valero and Plains announced they were abandoning the merger on Sept. 19, 2017.25 Despite the parties abandoning the transaction, California has requested the court to issue an order prohibiting Valero from acquiring one specific terminal at issue by any means for 10 years, otherwise California contends the case should still go to trial.26

This case is a good reminder that state attorneys general are becoming particularly active in merger enforcement, especially when a transaction raises local competitive concerns. The state enforcers can – and do – bring cases even when the federal authorities decline to take action.27 As a result, parties need to consider specific state issues when evaluating the risks of a transaction and work diligently during the investigation to address any state concerns.

Amazon/Whole Foods

On Aug. 23, 2017 – less than two months after Amazon announced its intention to acquire Whole Foods – the FTC announced that it had decided to close its investigation of the transaction.28 The deal generated a significant amount of interest, including numerous senators and advocacy groups encouraging the FTC to consider issues beyond the competitive implications of this specific transaction.29 The FTC, however, focused its analysis on whether or not there would be anti-competitive effects from the transaction and concluded there would not.

EnergySolutions/Waste Control Specialists

On June 21, 2017, the district court of Delaware enjoined EnergySolutions' proposed acquisition of Waste Control Specialists.30 Although the defendants argued that the companies did not compete because they offered different services and had different capabilities for disposing of certain segments of low-level radioactive waste (LLRW), the court agreed with the DOJ that the merging parties' processes for LLRW disposal were reasonably interchangeable such that the companies competed substantially with each other. Although the court adopted part of the DOJ's market definition – differentiating between lower-activity and higher-activity LLRW – it did not agree with the DOJ's attempt to further subdivide the market into the disposal of "operational" or "decommissioning" LLRW – noting that although there were differences between the two, the disposal options were still essentially the same. The court concluded that the combined company would have a 100 percent share for higher-activity LLRW disposal and a 96.7 percent share for lower-activity LLRW disposal. The court's conclusion that the parties competed directly was supported by reference to the parties' own internal documents and customer testimony.

The defendants also sought to mount a "failing firm" defense, arguing that WCS was likely to fail absent the merger. Despite recognizing that WCS had "never made an operating profit and consistently misses projections," the court found that the merging parties failed to show that there was a "good-faith effort" to elicit reasonable alternative offers from a buyer other than EnergySolutions. The court was critical of the merger agreement's "no talk" provision, which prevented WCS from seeking other buyers, even though there was evidence that other companies were interested in purchasing WCS.31

As this case demonstrates, there is a high bar for a company to meet the failing firm defense. Parties wishing to successfully invoke such a defense, therefore, must remember that they must demonstrate not only that the target is unable to meet its financial obligations and cannot reorganize successfully, but also that the firm (or assets) are likely to exit the market without the proposed transaction – meaning the firm has conducted a good-faith process to elicit reasonable alternative offers that would present less competitive concerns, but no reasonable alternative offers exist. And, as here, where the merger agreement explicitly prohibits seeking alternative buyers, relying on the "failing firm" defense is significantly more risky.

DraftKings/FanDuel

On June 19, 2017, the FTC filed suit to block the merger between DraftKings and FanDuel, alleging that the parties would control a combined 90 percent of the paid daily fantasy sports contests market resulting in a "de facto monopoly." The parties abandoned the transaction less than a month later.

Market definition was critical in this case – the FTC alleged a narrow market of "paid daily fantasy sports contests" that were distinguished from "season-long" contests. The parties, however, argued that their businesses compete with "many fantasy sports, sports entertainment, and other gaming and recreation companies."32

The FTC relied on a number of factors to demonstrate this distinction, including the cost (season-long contests are often free), exclusivity of player selection, and whether the contest players were generally focused on winning money (daily players) or interacting with friends and family (season-long players).33 The FTC also presented examples of the parties' internal documents purportedly illustrating robust competition between the two companies. For example, DraftKings senior executives commented in one document that the company planned to put a "foot on [FanDuel's] throat and press down hard," and "don't let up until they stop breathing."34 The DraftKings CEO also noted that: "[t]here is only one competitor of consequence – FanDuel."35 And, internal emails from both DraftKings and FanDuel showed competition among the parties on both price and quality.36

Ordinary-course business documents, including emails, continue to play an important role in merger investigations. Parties should have a good understanding of what their documents say and be prepared to address documents that do not support the parties' arguments. Moreover, given the prevalence and the potential perception by some businesses of the informality of email, it is critical that businesses are reminded that internal communications will be scrutinized for consistency with any antitrust arguments.

Conclusion

In sum, recent enforcement activity illustrates several important themes in merger review.

First, despite the change in administration and the number of empty posts at the FTC and DOJ, investigations are proceeding and the authorities are challenging mergers where they have concerns.

Second, state antitrust enforcers continue to be active and may take action even if the federal authorities do not.

Third, ordinary-course documents can play a critical role in merger investigations – the authorities regularly rely on such materials as evidence in their complaints. It can be very difficult for parties to overcome internal documents, emails or presentations that contradict the parties' arguments and theories about competition in the marketplace.

Fourth, HSR clearance is no safe harbor. The authorities will go after closed transactions – including transactions where an HSR filing has been made and the waiting period expired – if they believe the transaction raises competitive concerns.37 As a result, companies should be mindful that the failure to highlight meaningful overlaps to the authorities during the investigation stage may risk a post-closing challenge to the transaction.

Fifth, it is important to understand the risks of merger litigation. A victory in the early stages of litigation does not always mean the transaction will close. Given the risks, costs and time associated with litigating a merger, parties must determine whether proceeding to litigate is a realistic approach, and if so, devise a litigation strategy that fits with the company's broader goals.

Finally, the antitrust authorities continue to focus their analysis on the competitive effects of the transaction – and not extend the analysis to other factors such as jobs or public policy concerns.

  1. The FTC continues to operate with just two commissioners with no nominee and no permanent chair, while Makan Delrahim was just confirmed as the assistant attorney general for antitrust on Sept. 26, 2017.

  2. Justice Department Files Antitrust Lawsuit Against Parker-Hannifin Regarding the Company's Acquisition of CLARCOR's Aviation Fuel Filtration Business, Sept. 26, 2017.

  3. Complaint, US v. Parker-Hannifin Corp., at 4, No. 1:17-cv-01354 (D. Del. Sept. 26, 2017).

  4. Id. at 11.

  5. Id. at 1.

  6. Id. at 9.

  7. Id. at 8-9, 12.

  8. Id. at 3. Deputy Assistant Attorney General Donald Kempf commented: "Parker-Hannifin bought CLARCOR knowing that this transaction raised serious antitrust concerns." Justice Department Files Antitrust Lawsuit Against Parker-Hannifin Regarding the Company's Acquisition of CLARCOR's Aviation Fuel Filtration Business, Sept. 26, 2017.

  9. Complaint, U.S. v. Parker-Hannifin Corporation, at 15, No. 1:17-cv-01354 (D. Del. Sept. 26, 2017).

  10. See, e.g., Complaint, In the Matter of Valeant Pharmaceuticals International Inc., No. 151-0236 (F.T.C. Nov. 7, 2016); Complaint, U.S. v. Bazaarvoice Inc., No C-13-0133 (N.D. Cal. Jan. 10, 2013); Complaint, U.S. v. George's Foods LLC, No. 5:11-cv-00043 (W.D. Va. May 10, 2011).

  11. See, e.g., Parker-Hannifin 'Anticompetitive and Illegal' Deal not Shielded by HSR Clearance, DOJ Official Says, mLex, Sept. 28, 2017 (subscription required).

  12. Parker Acknowledges DOJ Filing Regarding its US Qualified Aviation Ground Fuel Filtration Business, Sept. 26, 2017.

  13. Parker-Hannifin 'Anticompetitive and Illegal' Deal not Shielded by HSR Clearance, DOJ Official Says, mLex, Sept. 28, 2017, (subscription required).

  14. Justice Department Files Antitrust Lawsuit Against Parker-Hannifin Regarding the Company's Acquisition of CLARCOR's Aviation Fuel Filtration Business, Sept. 26, 2017.

  15. In 2005, Valero sought to acquire the same terminals as part of a larger acquisition of Kaneb Services and Kaneb Pipe Line Partners. The FTC investigated the transaction, and Valero divested the two petroleum terminals at issue here as part of the settlement. The decree prohibiting subsequent re-acquisition of the terminals expired in 2015. See, e.g., Valero LP, Valero Energy Corp. et al., In the Matter of, FTC (FTC Sept. 16, 2005)..

  16. Order Denying TRO, Setting Briefing Schedule for Preliminary Injunction Motion, and Granting Limited Discovery, State of California v. Valero Energy Corp., et al., 3:17-cv-03786 (N.D. Ca. July 12, 2017). See also Amended Complaint, State of California v. Valero Energy Corp. et al., 3:17-cv-03786 (N.D. Ca. Sept. 6, 2017).

  17. Amended Complaint, State of California v. Valero Energy Corp. et al., at 2-3, 3:17-cv-03786 (N.D. Ca. Sept. 6, 2017).

  18. Id. at 3.

  19. Restraining Order Against Valero Energy Terminal Deal Filed Too Late, Judge Says, mLex (July 13, 2017) (subscription required).

  20. Order re Motion for Preliminary Injunction, State of California v. Valero Energy Corp. et al., 3:17-cv-03786 (N.D. Ca. Aug. 28, 2017).

  21. Id.

  22. Id.

  23. Id.

  24. Id.

  25. Attorney General Becerra: Valero's Abandoned Takeover of Independent Petroleum Distributor Is Welcome News for Californians and Competition, Sept. 18, 2017.

  26. Joint Case Management Statement, State of California v. Valero Energy Corp. et al., at 2-3, 3:17-cv-03786 (N.D. Ca. Sept. 28, 2017).

  27. See also State of Washington v. Franciscan Health System et al., No. 3:17-cv-05690 (W.D. Wash. Aug. 31, 2017).

  28. Statement of Federal Trade Commission's Acting Director of the Bureau of Competition on the Agency's Review of Amazon.com Inc.'s Acquisition of Whole Foods Market Inc., Aug. 23, 2017.

  29. See, e.g., Food and Water Watch, letter to the Federal Trade Commission, In re: Proposed Amazon-Whole Foods Merger.

  30. See, e.g., Food and Water Watch, letter to the Federal Trade Commission, In re: Proposed Amazon-Whole Foods Merger.

  31. Id. at 28-30.

  32. Answer and Defenses of Respondent FanDuel Ltd., In the Matter of DraftKings Inc. and FanDuel Ltd., No. 9375 (FTC July 3, 2017).

  33. Complaint, In the Matter of DraftKings Inc. and FanDuel Ltd., at 6-7, No. 9375 (FTC June 19, 2017).

  34. Id. at 2.

  35. Id. at 9.

  36. Id. at 9-10

  37. See, e.g., US DOJ: Merger Counsel Should Highlight Overlaps, Global Competition Review (Sept. 28, 2017).

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